A budget is a spending plan based on income and expenses. This plan is important as it helps you keep in control of your finances, which will help with saving and debt repayment, avoiding wasteful spending, and reaching your goals.

Common Strategies

Mentioned under saving, the 50-30-20 rule involves splitting your after tax income into three categories: 50% towards needs, 30% towards wants, and 20% towards savings. Needs include housing, utilities, groceries, and transportation. Wants include entertainment, hobbies, and dining out. The amount towards savings can be allocated towards repaying debt, saving for a big purchase, or building an emergency fund.

Zero-based budgeting involves allocating every single dollar of your income into categories of expenses, leaving you with $0 left over. This method requires you to anticipate all of your upcoming expenses so that you can allot your income properly, and will help you avoid impulse purchases. Savings should also be a category of expense, making it easier to pay off debt and build wealth.

Similar to zero-based budgeting, the envelope budgeting method is a cash-based system where you allocate your income into different physical envelopes, each representing a specific spending category of expense. Once the money in an envelope is spent, you cannot spend any more in that category until the next budgeting period, helping to control overspending. This method encourages mindful spending and can make it easier to stick to a budget by providing a visual and tangible representation of your money. Envelope budgeting can be especially effective for those who struggle with digital tracking and prefer a more hands-on approach.

For both zero-based budgeting and envelope budgeting, start with your fixed expenses (expenses that you pay the same amount each time), such as rent, and then plan for your variable expenses (expenses that change each time), such as entertainment and groceries. If you have remaining funds at the end of the month, you can roll over the remaining funds into the same category for next month, transfer the remaining funds into a different category, or put the remaining funds into savings.

Using envelopes to keep track of spending may be helpful for those who struggle with digital tracking and prefer hands-on options

Budgeting for Different Expenses

There are many options for transportation, ranging from using public transportation, to biking, to buying a car. If you do decide to buy a car, you would have to pay for interest and maintenance, and the car may depreciate (decrease value) over time. Some strategies to avoid going bankrupt because of a car would be to avoid buying new cars (because a car depreciates the fastest in the first five years), and to buy using cash if possible.

When shopping for groceries, keep in mind that everything in the store is strategically placed so that the customer feels tempted to make spontaneous purchases. For example, eye-catching flowers are placed near the front of the store, the most expensive goods are placed at eye-level, and candy and gum, the most common impulse purchases, are placed right at the checkout, taking advantage of decision fatigue which makes shoppers more open to decisions. Being aware of these traps retailers often set can help you stick to your budget and avoid overspending on things you don’t need.

When deciding to purchase a house, consider your mortgage terms and how much money you have left over after down payment.